Outpacing Change — Charlie Scharf, CEO Visa
The Industrialist’s Dilemma — February 18, 2016
Few people appreciate the scale of Visa’s business. With a market capitalization of more than 170 billion dollars, revenues of 14 billion, and earnings of 6 billion, Charlie Scharf is in an enviable position. If you’d only looked at the financial multiples awarded to with Visa, you’d probably expect the company to be some “new-agey” internet disruptor; a Facebook, Google, or LinkedIn. But Charlie’s company is not an internet company. Instead, it’s a payments network. And it’s one that is making the transition into an increasingly digital age with a lot of elegance.
Since taking the helm of Visa in 2012, Charlie has helped to grow the company’s net income by more than $4 billion annually. He’s added approximately nine thousand employees. And he’s revolutionized the way Visa works in service of partners and customers, increasingly offering digital tools to consumers and developers alike so they can derive increasing value from anyone who issues a Visa card.
But what was most interesting about our conversation with Charlie was how thoughtful he was on the subjects related to industrial change. Throughout our course, we’ve detailed the issues facing incumbent businesses in the face of digital change — channel conflict, dependency on outdated advantages, and a lack of relevant skills. Charlie seemed to be aware of all these issues and was systematically addressing them within Visa.
But three lessons, above the others, stood out.
Digital Transformation Requires Continuous Communication
It’s hard to argue that Visa’s business is in dire straits. Visa is a prime example of a business with strong network effects. Namely, a great deal of the company’s value to consumers is driven by its ubiquity — the balance of masses of consumers and thousands of merchants. Even with the advent of potential new transactional frameworks like blockchain, overcoming the network effect that Visa, Mastercard, and American Express has built would be challenging.
But being in a strong position is no justification for resting on your laurels.
Over the course of our session with Charlie, something struck each of us: as a leader he was very open. One of the first things that he stressed was that open discourse with his executive team and with his employees was critical to changing the way the company operates. Yes, as we pointed out during our discussion with Tony Fadell, protecting a separate organization was still critical for success. But equally important was acknowledging what Visa did well and what potential partners and competitors did better.
At various points in the discussion, Charlie referenced how he framed his competitors to the employee base. He described turning to digitally native businesses to illustrate how fast an organization can become. He also outlined how he constantly stressed the company’s goal was to add value to Visa’s customers in an attempt to keep people focused on creating value instead of preserving the status quo. Finally, he talked about the openness to which he discussed the importance of the core business. At no point should an employee at Visa working on the core business feel like a second hand citizen — or vice versa. Open communication with employees became a recurring theme. Regardless of the line of questions, Charlie seemed to bring up some amount of transparency.
This probably isn’t surprising for most seasoned executives. In business schools across the country we preach the values of transparency and authenticity in leadership. But all too often during conversations regarding transformation things are either completely dire or completely rosy. Charlie’s approach — having an open and evolving dialogue about the opportunities and risks for the business — seemed to allow Visa to invest in experimentation before an existential threat arose.
What Drove Competitive Advantage Won’t Always Drive Competitive Advantage
As I mentioned above, Visa’s business is a pretty robust one. But most businesses tend to fade away over time. Part of the reason for this can be explained by what economists call perfect competition. When products can have perfect substitutes and new entrants can freely come and go in a market, economists presuppose that new entrants will pursue highly profitable markets with a willingness to undercut their competitors on price. Over time, this is supposed to drive profit out of the industry.
The network effects that payment networks enjoy help to keep this pressure in check. However, we were particularly impressed that as we asked Charlie about Visa’s competitive advantage over the next decade he was aware of how other networks based on ACH payments or blockchain might try to recreate the ubiquity that Visa has delivered.
As new entrants focus on expanding their services, Charlie stressed that he will continue to differentiate by focusing on delivering value in ways where he has a unique “incumbent advantage.” One example of this was fraud prevention. While new entrants might be able to build lower cost transactional systems, it is almost impossible for competitors to deliver the same risk algorithms that Visa can build with their mass of transactional data. Despite what pressure may come against their core business, if the company is able to acknowledge that they constantly need to look for new sources of competitive advantage they should stand to benefit.
Even the Best Innovators Worry about their Ecosystems
Throughout the course, we’ve argued that dependencies on existing value networks — suppliers, distributors, and partners — has stood in the way of innovation. Despite Visa’s focus on innovation, this challenge remains the same. For consumers, payment systems now add direct value. Paypal helps consumers maintain a balance, Stripe securely stores their personal information, and Venmo adds social capabilities. While Visa might enjoy adding all these capabilities to the core product, the challenge arises when the tools they build circumvent their issuers.
As Charlie discussed innovation within Visa, he was quick to point out that he needed to be exceedingly cautious when thinking about when to sacrifice a legacy relationship for the sake of innovation. When Visa did develop a new service (such as their “Checkout with Visa” product) that appealed directly to consumers, he needed to think about how he would position its value to the card issuers that drive his business.
For many of our CEOs, this channel dependency has served as a somewhat insurmountable barrier. Charlie’s issuers are his core customers and the reason why he’s able to continue growing at such a respectable rate. He could pursue number of meaningful innovations in concert with his ecosystem as long as he demonstrates their value to his partners. Because without his partners, the entire model doesn’t work.
Our take: even the best innovators, with the most thoughtful approaches to digital transformation, still can’t get around this issue. Especially when your business is so fundamentally tied to existing partnerships, coming up with a methodology to help you manage this transition with your ecosystem partners is often a more practical solution to this challenge than developing the operating models to obviate those partners entirely.
